Bonds vs debt funds vs FDs: Which one to pick?

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Key points

• ETMarkets Smart Talk Bonds vs debt funds vs FDs: Sandeep Yadav explains the tax trade-offs investors should know.
• Treasury heads in buying mode as 5-year yield jumps With administration bond yields now at attractive levels, treasury heads are actively thinking concerning making purchases.
• Edited Excerpts – Q) What is your take on the MPC policy session outcome?
• Given the uncertainties surrounding the Iran conflict and monsoon patterns, the RBI had little choice but to wait and watch the data.
• Yadav additionally points to income-plus-arbitrage and certain hybrid funds as potentially more tax-efficient options for long-term investors.

With interest rates and bond yields still offering attractive entry points, investors face an significant choice between fixed deposits, direct bonds and debt mutual funds. Sandeep Yadav, Head – Fixed Income at DSP Mutual Fund, believes tax efficiency should be a key part of this decision. While debt mutual funds provide the advantage of deferred taxation, he highlights how direct bonds offer long-term capital gains benefits but limited scope for capital appreciation.

Treasury heads in buying mode as 5-year yield jumps With administration bond yields now at attractive levels, treasury heads are actively thinking concerning making purchases. After the RBI's FCNR(B) scheme concluded, the five-year bond yield closed at 6.52%. Although there's speculation regarding a delay in renewed buying due to upcoming policy minutes, the banking sector's liquidity remains robust, with funds ready to be invested shortly. HDFC Bank raises record $1.75 billion in overseas bond sale.

India bond yield curve flattens on central bank unpredictability, demand for long-term debt. Investors dump India bonds after hawkish RBI minutes. RBI's surprisingly hawkish tone in policy minutes weighs on Indian bonds.

In an interaction with Kshitij Anand of ETMarkets, he additionally shares his outlook on interest rates, the case for locking in yields now, and how investors could deploy ₹1 crore in fixed income over a three-year horizon. Edited Excerpts – Q) What is your take on the MPC policy session outcome? Do you see interest rates going higher or lower in the near term? Live Events.

A) The RBI's decision was along projected lines. Given the uncertainties surrounding the Iran conflict and monsoon patterns, the RBI had little choice but to wait and watch the data. Looking ahead, we expect their next move to be a rate hike. With global inflation rising, solid economic data from both the US and India, and the US Fed leaning towards hiking rates, the RBI's next move looks like a hike. Q) With the RBI repo rate at 5.25%, are we still in an environment where investors can lock in attractive yields, or has the best part of the rate cycle already passed? A) Funds investing in funds market instruments and short-term bonds still offer great value. The extra carry they offer over the repo rate remains attractive. Since a rate hike is still some time away, high starting yields act as a solid cushion against any yield rise. Q) Is it better to lock in a 7% yield on a high-quality bond today or wait for potentially higher yields if inflation or oil rates push rates up? A) Waiting for a better yield comes with a carry loss. If you were to park your funds in an overnight fund, your daily returns would be almost 2% lower. The opportunity cost of sitting on the sidelines for any rise in yields is particularly high. It makes much more sense for an investor to lock in those yields today.

Taken together, the developments around bonds vs debt funds vs FDs: Which one to pick? Point to a situation that is still moving, and the coming days should bring more clarity.